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Tuesday, February 14, 2012

The Department of Justice’s New Interpretation of the Wire Act: A Green Light for Video Game Betting?

Last year was tough for online poker. A lot of people were swept away in poker’s surge in popularity in the early 2000s. A big part of the spike in was a new generation of players who cut their teeth playing online. You might remember Chris Moneymaker, the first World Series of Poker Champion to qualify from online tournaments. Some used the skills they picked up on the web to transition to the tables of Atlantic City, Vegas, and Reno. Others chose to focus on online play and made a healthy income doing so. The New York Times Magazine profiled one such prodigy, Daniel Cates in late March of last year. But the legality of online poker was suspect since the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006.

The Department of Justice put a stop to the boom when shut down the biggest and most lucrative poker sites just weeks after the article on Cates was released, including the UIGEA in the indictment. Full Tilt Poker, Poker Stars, and Absolute Poker, played a “game of cat and mouse” with the US Government, and did business here while operating offshore. They argued online poker was not gambling, but a “game of skill”. The Department of Justice was not persuaded: they quickly shut down domains, filed a civil lawsuit for money laundering, and froze company assets. With such a dramatic blow to the biggest outlets in the market, it was easy to assume online poker in the United States might not recover at all.

Maybe not. In a decision reached in September but made public in late December, the Department of Justice has made a dramatic reinterpretation of the Wire Act. According to the ruling, the law’s ban on betting crossing state or international borders now only applies to a “sporting event or contest,” not to online lottery tickets. Professor I. Nelson Rose made a great post summarizing why this matters for online poker. The Wire Act can be used against people who attempt to make cross-border bets on events. But a lottery is not a bet on a separate event: when you buy a ticket, you are wagering whatever you pay on winning the pot based on the numbers drawn, not something external. Instead, it’s a bet in the event. As Professor Rose points out, a bet placed during a poker game follows the same logic. When you wager money on your hand, you’re not betting on anything other than that round itself.

This likely will not mean that the lawsuit against the big poker sites is over with. The Federal Government has made clear they are concerned about technology facilitating illegality, like money laundering. It would be hard to believe that the Department of Justice would make such a sweeping show of force against those poker sites, then abandon the effort. It could mean that online poker could see a rebirth, provided players are in states where that sort of gaming is legal. Due to its checkered past, anybody considering getting into the business would “wait and see”, making sure they are on solid legal footing before putting down any serious investment.

What is particularly interesting to us at Law of the Game is that this could open the door for gamers to make legal bets on their own performance in online gaming tournaments. Players of games like Call of Duty: Black Ops can already wager points used to purchase new items and skills based on their performance in a given round. If it is legal, a player could place cash bets on how they might perform on a given round, or the entire tournament. Remember, it would be a bet in the event, not on. There are some important caveats to consider.
It will be up to game companies whether or not this kind of infrastructure is set up. Some might not find it appropriate for a title, either because of the intended audience or the mechanics of the game. Companies would also need to consider whether they want to assume the burden of regulating betting on their game. The Department of Justice would want to make sure that online games were not being used to launder money, so they would expect gaming companies to take appropriate precautions: tracking bettors, making sure games are not fixed, and so on. Game companies have a vested interest in making sure that their product promotes fair competition, and no one wants to get caught up in illegality. That regulatory burden could provide a benefit.

Game companies would want a fee for their troubles. It could take the form of a temporally charged amount above and beyond the amount it costs for a subscription service like Xbox Live, or a per-bet percentage on every wager, win or lose. If the gambling systems on games became popular, this income stream could convince a company wary to dive in the market. A wagering system could extend the shelf-life of a game for quite some time. World of Warcraft just turned seven years old, but it is still generating income for Blizzard today. This is due in no small part to the subscriptions every player must buy. Subscription or transactional fees could be a powerful enticement to bring companies into the business.

This could also signal the return of integrated gambling models like we saw with Kwari, and an increase in 3rd party tournament sites, as we have previously discussed. It will be interesting to see if a proliferation of tournament sites puts their operators in conflict with the game developers/publishers, and what creative lawsuits may result.
Online poker’s future is still an open question, and any type of betting on video games would probably be preceded by a more concrete development clarifying poker’s legality. But, as Professor Rose points out, there are not many federal regulations left prohibiting the interstate transactions involved in gambling. In fact, there have already been proposals, including one from Representative Barney Frank, to overturn the UIGEA, and move the industry to regulation and taxation on a nationwide level.

As budgets get tighter, there is always the lingering question of whether the previous moral objections to online gambling might give way to the very present opportunity to increase government revenue and create jobs. If companies can put in the time and effort to keep the competition fair and above board, we might be able to put cash down on our performance on Mario Kart. Which, reminds me: do not bet on a game of Mario Kart with Mark, it is a bad idea.

Zack Bastian is an official contributor to Law of the Game. A third year student at George Washington University Law, Zack works at the Woodrow Wilson Center's Science and Technology Innovation Program and is a member of the American Intellectual Property Law Association. The opinions expressed in his columns are his own. Reach him at: zack[dawt]bastian[aat]gmail[dawt]com.

Editor in Chief

Mark Methenitis is an attorney in Dallas Texas. Mark received his Juris Doctorate and his Master of Business Administration from Texas Tech University and his Bachelor of Arts from The University of Texas.

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